It is now generally accepted that cycles of all kinds occur in nature and that they also occur in financial markets although with less formality than in the natural world. Markets go through cycles both on higher and lower level time frames. The forex market cycles each year as waves of liquidity and trader interest peak, plateau, fall off, bottom out, track sideways and then rise once more. It can be hard to pick any long-term trend and ride it during such periods. Price ranges through much of this time, interspersed with trade-killing spikes when news breaks.
Forex trading systems are what we often call “reactive systems”. There are many factors at work, and they cannot be quantified and measured to enable decision making. Forex traders therefore trade the trend. In other words they try to time the market. Most successful forex traders believe that the markets have a cycle. This cycle is the result of human behavior in the markets. As a result of this innate human behavior, trends seem to repeat in the market. If a trader can chart these trends and predict future movements, a fortune can be made! The critical part here is recognizing the different stages in the market and which stage you currently lie in.
Market cycles are often hard to pinpoint until after the fact and rarely have a specific beginning or ending point. However, most market veterans believe they exist, and many investors pursue investment strategies that aim to profit from them by trading securities within the swings of the cycle. Market cycles take both fundamental and technical indicators (charting) into account, using securities prices and other metrics as a gauge of cyclical behavior. Some examples include the business cycle, semiconductor/operating system cycles within technology and the movement of interest-rate sensitive financial stocks.
Most markets will exhibit one of three predominant market conditions. It doesn’t matter if you analyze a market fundamentally, technically, spiritually or by consulting with the stars: Prices move in different types of patterns. But traders don’t just want to identify these patterns, they want to use them. By identifying these patterns or states of a market; the trader can more eloquently decide how to trade in that particular environment. The three major market conditions are trends, ranges, and breakouts. Once again these conditions or states are often driven by fundamentals or news. Once a trader identifies these conditions they can employ the proper strategy to trade in that market.
Although not always obvious, cycles exist in all markets. For the smart money, the accumulation phase is the time to buy because values have stopped falling and everyone else is still bearish. These types of investors are also called contrarians since they are going against the common market sentiment at the time. These same folks sell as markets enter the final stage of mark-up, which is known as the parabolic or buying climax. Smart investors who recognize the different parts of a market cycle are more able to take advantage of them to profit. They are also less likely to get fooled into buying at the worst possible time.
